Oil below $100 as Iran 'makes strait of Hormuz offer'
Newsflash: The oil price has dipped below the $100 a barrel level.
This follows a report on the Kyodo news service that Iran has offered to reopen the Strait of Hormuz within seven days if the United States takes initial steps toward easing military pressure.
One senior Iranian government official told Kyodo:
But the official added that Washington must demonstrate “seriousness and commitment” if diplomacy is to advance.
Neil Wilson of Saxo Markets says:
Closing post
Time to wrap up (as we’re playing a Dragons Den game at the Bond Vigilantes Forum here in London #OutOfMyDepth):
The oil price has dropped to its lowest level in two weeks, on hopes of a pick-up in supply from the Middle East.
Brent crude fell as low as $97.43 a barrel, following reports that Tehran had proposed reopening the strait of Hormuz in seven days if a US blockade was lifted.
Traders also noted that Saudi Arabia is trying to resume flows on a vital pipeline that was disrupted by drone attacks this month.
Donald Trump has told the UN’s General Assembly that he believes Iran will make a deal after November’s midterm elections.
But at pixel time, Brent crude is trading at a smidgen over $100/barrel.
Economists have warned that the UK public finances look dismal, after borrowing jumped in August.
The UK government borrowed a higher-than-expected £18.3bn last month, increasing the pressure on John Healey as he attempts to calm jittery bond markets before next month’s budget.
Bond investors have been told that UK and US government bonds would be significantly lower if Trump had not launched the Iran war.
M&G’s Bond Vigilantes Forum also heard that there are opportunities in the fixed-income world, thanks to the jump in yields since February.
M&G fund manager Miles Tym told reporters that the big risk from the budget is that government spending isn’t controlled as much as bond investors hope.
He says:
Andrew Chorlton, chief investment officer at M&G, welcomed the lack of leaks ahead of next month’s budget, and warned that the government “has a balancing act to play”.
Chorlton also flagged that the AI industry is starting to arguably dominate credit markets, due to the massive borrowing underway to fund data centres.
The Bond Vigilantes Forum also heard that the UK’s fiscal position, although challenging, is more attractive than certain other countries, such as the US, as Britain has plans to bring its deficit down.
And with that, it’s time to try to win a prize:
Big interest rate cut in Nigeria
There’s been central bank drama today – the Central Bank of Nigeria has unexpectedly made its largest interest rate cut in amost two decades.
Nigeria’s monetary policy committee lowered its benchmark rate to 23% from 26.5% today.
That’s Nigeria’s largest reduction according to data going back to 2007, Bloomberg reports.
M&G’s fund manager Charles de Quinsonas, who kindly brought this cut to my attention, says that this gives “a sense of the yields” that are still available in emerging markets, as Nigerian inflation is expected to drop from its current rate of 15%.
After a quick break, the Bond Vigilantes Forum is back in session, and learning that the rise in private credit has taken much of the risk out of the high yield bond market.
That’s according to M&G’s deputy CIO, Stefan Isaacs. He points out that 10 years ago, the high yield (ie, riskier) market was primarily funded through corporate bonds and to a lesser extent, by leveraged loans, has become a market that is very significantly funded by private credit.
Over that timescale, private credit has grown five-fold, and has been competing for opportunities to lend with the higher-yielding markets.
The speed of that growth means that some mistakes are likely to have been made, Isaacs warns, saying:
Without Iran war, US 10-year yields would be 'between 3% and 4%'
Interest rate on US and UK bonds would be significantly lower if Donald Trump hasn’t launched his war with Iran this year, bond investors have heard.
M&G fund manager Ben Lord tells the Bond Vigilantes Forum here in the City that “we were so set” before the war began – inflation was about to fall to 2%, and central banks were all going to be cutting interest rates.
Today, US 10-year Treasuries are trading at a yield (rate of return) of nearly 5%, with UK 10-year gilts around 5.2%.
Lord says he believes that 10-year Treasury yields would be somewere betwen 3% and 4% now, if Trump hasn’t launched the war at the end of February.
But these higher yields do mean that, after a long time, investors are now being paid to take duration risk, Lord adds.
M&G: Fiscal drag improving UK's fiscal position
The UK’s fiscal position, although challenging, is more attractive than certain other countries, such as the US, the Bond Vigilantes’ Forum hears.
M&G fund manager Miles Tym points out that in the US, the debt high but the deficit is high as well and set to remain high for the foreseeable future.
Tym says:
Tym then explains that the UK’s net deficit has started to fall and is set to continue to fall over the next couple of years.
He suggests that it’s not “fully appreciated” that UK fiscal policy is set to tighten by a reasonable amount over the next two or three years.
Not through hikes in tax rates, but through fiscal drag, where tax bracket thresholds are frozen.
Tym explains:
Q: How much of the recent rise in the US Treasury yields is due to the oil price and the situation in Middle East versus expectations of higher growth or Trump’s inability to manage the fiscal deficit?
M&G’s Richard Woolnough replies, citing research showing a correlation of over 90% between oil price moves and Treasury yields.
The term ‘Bond vigilantes’ does sound a little threatening, associated with soulless investors who will step in and prevent governments borrowing as much as they’d like.
M&G’s Richard Woolnough argues that they are not the bad guys, though.
Woolnough tells today’s BV Forum:
Opportunities in the bond market, despite the risks….
M&G’s Andrew Chorlton then repeats the argument he ran past the journalists over lunch earlier – that there are lots of opportunities in the fixed income market.
Chorlton acknowledges that it’s been painful in the bond markets, and volatile, and there’s lots of risks on the horizon.
But those risks are well known, he argues.
The AI industry is starting to arguably dominate credit markets, M&G chief investment officer Andrew Chorlton tells the Bond Vigilantes Forum.
He argues that there are effectively got two credit markets at the moment – AI companies who are issuing debt at a rapid rate to fund their infrastructure rollout, and the rest of the market.
Chorlton says:
Jim Leaviss remembered
Investment manager M&G is now holding its annual Bond Vigilantes Forum in the City.
The event was inspired by M&G’s excellent Bond Vigilantes blog, created by Jim Leaviss, the well-respected fund management veteran who very sadly died in July.
Attendees are reminded of Leaviss’s “unwavering commitment” to making bonds fun and interesting, and:
M&G: Market hopes budget will keep spending under control
Q: What are the big risks from next month’s budget, for the bond markets?
M&G fund manager Miles Tym says the big risk is that government spending isn’t controlled as much as bond investors hope.
He says:
Tym explains that the market accepts that there won’t be big spending cuts, but it is looking to see that the government is keeping spending under control.
And if taxes need to be raised, that this involves “credible ways” that aren’t too damaging.
The drop in the oil price today will interest bond investors, as the cost of crude has had a major impact on fixed-income markets this year.
Asked about the correlation between the oil price and bond yields, M&G fund manager Eva Sun-Wai tells reporters in London that higher oil has created a difficult policy challenge for central banker.
Sun-Wai explains:
Lack of budget leaks welcomed
The lack of leaks ahead of next month’s budget is an encouraging sign, Andrew Chorlton, chief investment officer at M&G explains.
Chorlton tells journalists here in London that the UK’s market reputation has been damaged in the past by leaks, backtracking, and some measures that have been expected then not being included in the budget after all.
He adds:
Looking at the UK, he says:
Chorlton then jokes that hopefully we won’t get another new chancellor before the budget (!) on 28 October, adding:
Bond markets in a 'fairly healthy' place
The bond markets are at a “fairly healthy starting place” following the recent rise in yields, argues Andrew Chorlton, chief investment officer at M&G.
He’s speaking at a lunch event in the City now (at the top of M&G’s rather stylish Leadenhall site).
And he’s explaining to the assembled journalists that fixed income is offering more attractive valuations.
Chorlton points out that, with US Treasuries and UK gilts yielding 5%, investors are being offered real yields of 2% to 3%, which is ‘not a bad starting point”
Petrol and diesel prices head higher, says RAC
Despite the drop in oil prices this week, fuel prices are still heading higher, with diesel getting closer to £2 a litre.
The latest figures from the RAC motoring group show the average price of unleaded and diesel have both crept higher, to 172.85p a litre and 196.89p a litre respectively.
The unleaded price is now 40p per litre higher on average than it was at the start of the war while diesel is 54.5p more expensive.
This has become a real problem for some people. “Around half my day’s pay goes to filling up my car now,” says Jon Barden, a former humanitarian adviser turned handyman, who says his fuel costs have doubled. His diesel Ford estate, once used for camping trips, is now used to carry heavy tools to jobs around Tottenham in north London.
Back in the UK, conditions in the factory sector have picked up.
Total order books were reported as below “normal” in September, to the smallest extent since July 2023 (-9%, from -25% in August), new data from the CBI shows.
Oil has now hit a new low of $97.50 a barrel.
That’s still some way above Brent’s pre-Iran war levels of around $72 a barrel, though.
Oil is continuing to drop, and has touched a two-week low.
It’s now traded as low as $98.33 a barrel, its lowest since 8 September.
